There’s no textbook definition of “aggressive” stocks, it’s more of a relative definition based on your personal risk tolerance. A very conservative investor may consider investing in shares of any individual stock to be an aggressive move; a more moderate investor may see a stock with a beta (relative price movement compared to the S&P 500) above 1.5 as aggressive; likewise, a highly risk-tolerant investor may see the elevated beta without batting an eye as he or she may consider only the most speculative biotech company an aggressive investment.
But relative definitions aside, there’s a case to be made for setting aside a portion of your investing portfolio for higher-risk/higher-reward stocks.
A few years ago, a national poll conducted by the Pew Charitable Trust, in conjunction with focus groups in three major cities, found that 92 percent of Americans prefer the security of financial stability over income growth. Meanwhile, 69 percent of Americans worry that they won’t have enough money to retire.
Most investors’ response to that conundrum is paralysis. They know they need to set aside more than they are now but don’t want to take on more risk than they have to. So they simply shovel money into retirement accounts, move a few dials to make the blend of stocks, bonds, growth, income, etc. match what advisors say they “should” have at their age and then they check on it periodically to move the dials as they speed towards retirement hoping that they’ll have enough when they hit their career finish lines.
That “set it and forget it” approach is low-stress (until they approach retirement) but leaves their retirement entirely to the whims of the market. A poorly timed significant correction can easily leave prospective retirees scrambling if retirement is fast approaching.
The Truth About Aggressive Stocks
If your portfolio doesn’t include some exposure to aggressive growth—meaning you own individual stocks that are leaders in a bull market—you’re short-changing yourself. Will these aggressive growth stocks underperform when the market corrects? Of course! And that’s why you need an advisory like Cabot Growth Investor, which will lower your exposure to growth stocks when the market turns bearish. But not having any exposure to aggressive growth stocks because there’s risk isn’t a responsible way to manage your portfolio; after all, the preferred choice of financial advisors, which is to stick your entire equity exposure into index funds, has produced three monumental drawdowns since the 21st century began.
Even so, investing in aggressive stocks is not for everyone. Here are some of the factors to consider before taking the plunge.
The Pros
- Though mutual fund people and financial advisors seldom acknowledge this, it is possible to beat the broad market by strategically investing in aggressive growth stocks.
- With the right aggressive investing strategy, you’ll have the most money invested in your biggest winners and the least amount invested in your worst choices.
- When you find a few good stocks, the gains can come in big bunches.
- You can buy smaller amounts if you want to invest in fast-moving stocks but don’t want to live and die with every tick of the market.
- For investors who have gotten sufficiently terrified about the state of their retirement accounts only recently as their personal odometers have ticked over into their fifth and sixth decades, aggressive stocks have the potential to help you maximize your investments.
The Cons
- With higher returns comes higher risk.
- Managing an aggressive growth portfolio isn’t easy. It takes hours of study and analysis, and you have to be prepared to live through some dismaying down moves as stocks hit the rocks from adverse earnings reports, scandals, market downturns, and inexplicable failures to thrive.
- To get the big winners, you must invest in fast-growing leaders, but you also need a position you can hold onto for months without panicking, because big moves play out over time.
- The more volatile your results, the more faith you’re going to need to stick with a system. It’s easy to stay with the plan when all your stocks are going up, but it’s infinitely more difficult when a falling market and some bad earnings results are gashing your portfolio, especially when the pain continues for many months.
Many investors are searching for a system that (a) invests in cutting-edge leading stocks with dynamic new products or services, and in turn, allows them to hit the occasional home run … but (b) they don’t want to see their portfolio take enormous drawdowns during the occasional sour earnings season.
Can you have both? To some extent, yes. To get there, all you need to consider are two simple portfolio management techniques: position sizing (buying smaller amounts, dollar-wise, of a stock) and taking partial profits (buying larger positions, but taking some profits when things are good).
Finding aggressive stocks isn’t easy, but we’re here to help you. Cabot Growth Investor reviews IPOs, market leaders, the stocks to watch, what to hold, and what to sell. Learn how to profit from growth stocks with Cabot’s time-tested investing system.
